Court Must See If Company Is A Threat To Commercial World For Winding Up U/S 433(f) Of Companies Act: Allahabad High Court

The Allahabad High Court has held that for winding up of a company under Section 433(f) of the the Companies Act, the Court must opine that the company is a threat to the commercial world if it remains in existence.

Rejecting the application for winding up of a company, Justice Pankaj Bhatia held

“To appreciate a case for winding up of a company on the ground that it is just and equitable, it is essential for the Court to form a view that in view of the status of the company, if the company is not wound up, the same would amount to a threat to the commercial world and the existence of the company is not desirable for the commercial world.”

Section 433 of the Companies Act provides for circumstances in which company may be wound up by Tribunal. Section 433(e) provides winding up when company is unable to pay its debts. Section 433(f) provides that if the Tribunal opines that it would be just and equitable to wind up the company.

Section 434(1)(a) of the Companies Act provides that a company is deemed unable to pay its debts when the dues exceed 1 lakh rupees and the borrower has failed to discharge its liability within 3 weeks of the demand notice from the creditor. Section 439(1)(b) provides that application for winding up can be made by any creditor or creditors, including any contingent or prospective creditor or creditors.

Section 20(1) of The Sick Industrial Companies (Special Provisions) Act, 1985 provides procedure for winding up of sick industrial companies.

Case Background

In 2012, Petitioner company filed an application for winding up of the respondent company under Section 439(1)(b), Section 433(e) & (f) and Section 434(1)(a) of the Companies Act as well as under Section 20(1) of The Sick Industrial Companies (Special Provisions) Act, 1985 on grounds that the respondent failed to pay the admitted dues of Rs.21,55,52,263/-.

Petitioner pleaded that the officials of the respondent company were trying to defraud the creditors by selling the machinery and that the company had been lying closed for 10 years. It was argued that the respondent had taken loans for which the directors had given unconditional and irrevocable personal guarantees and equitable mortgage was also created on properties of the company.

It is pleaded that the Board for Industrial and Financial Reconstruction had recommended winding up of the respondent company in 1996 and the same was approved by the Appellate Authority for Industrial and Financial Reconstruction as well as the Delhi High Court with adverse remarks against the respondent company. Upon failure to liquidate the dues, the financial institutions filed a case before the DRT where recovery certificate was issued against the respondent company and cost was imposed.

It was also argued that a Deed of Assignment was entered between petitioner and IDBI Bank by which the debt owed to the IDBI Bank by the respondent was transferred upon the petitioner company. Further, the debts owed by respondent to ICICI Back and State Bank of India which were assigned in favour of Kotak Mahindra Bank. Petitioner pleaded that respondent borrowed money from it to repay the due of Kotak Mahindra Bank and IFCI Limited and the financial instruments of the respondent were handed over to the petitioner.

Despite admitting the debt of secured loan and unsecured debt, petitioner pleaded that the respondent failed to clear dues. After reminder notices, petitioner sent a notice under Section 433 and Section 434 of Companies Act for paying the dues and winding up. It was also argued that since the notices returned unserved, petitioner published them in 2 daily Newspapers.

High Court Verdict

The Court rejected the contention of the petitioner that though the petition was not filed under Section 433(c) [winding up of company if the company does not begin business within 1 year of incorporation or suspends business for a whole year] the Court could have considered additional grounds at the time of arguments.

It observed that the respondent company had admitted its liability of Rs.64.30 Lakh and had offered to pay the amount as the Court deemed fit.

Regarding the assignment deed between petitioner and IDBI Bank, the Court observed that the respondent had already entered into a one-time settlement with the Bank and no dues were left. Accordingly, it was held that no deed could have been registered for dues which did not exist. It was held that applying Section 3 of the Transfer of Property Act which defines actionable claims, it could not be said that the petitioner had any actionable claim once the debt between respondent company and IDBI Bank had already been settled prior to the alleged assignment deed being signed.

“It is clear that the debt assigned should be a 'debt recoverable' in accordance with law and cannot include the 'waived debt' unless the clauses of the assignment deed clearly specify and the settlement in between the assignor and the borrower is also specifically mentioned. This aspect makes it clear that, in any case, claim of petitioner company based upon assignment deed is clearly not an undisputed claim and is a contentious issue. Thus, I have no hesitation in holding that the claim of the petitioner/company based upon the 'assignment deed' cannot be a foundation for seeking winding up.”

The Court held that once the respondent company had offered to pay the dues during the course of proceedings, it could not be said that they were neglecting their duty to repay the dues which is a “sine qua non' for invoking Section 433(c) and 434(1)(a) of the Act.”

Fixing the timeline for payment of dues, the Court held that the Company was not a threat to the commercial world to order its winding up under Section 433.

Accordingly, the petition for winding up of the respondent company was dismissed.

Case Title: Zaitek Polyblends Pvt. Ltd. v. Sri Durga Bansal Fertilizer Ltd. [COMPANY PETITION No. - 6 of 2012]

Click Here To Read/Download Order